Moody's: halo for new EU entrants set to fade

European Union (EU) member countries with low credit ratings, such as Romania and Bulgaria, will continue to benefit disproportionately from the EU halo effect, according to a report by Moody’s Investors Service.

Romania and Bulgaria, which joined at the start of this year, each have Baa credit ratings. The “halo effect” of EU membership means new EU entrants tend to see their credit ratings climb, due to the improved institutional and legal environment, which reduces financial risk.

However, the report predicted that future new entrants, such as – potentially - Turkey, will see a weaker halo effect. The EU is facing greater foreign competition, growing governmental inefficiency and growing internal inequality, that would reduce the perceived advantage of membership, the report said.

Countries that have demonstrated considerable increases in credit ratings include Slovakia, which increased from Ba1 in 1999 to A1 in 2006, and Lithuania, which increased from Ba1 in 1999 to A2 in 2006.